INSIDE VIEW: France is looking up

Flying somewhat under the radar, French small and medium-sized companies (SMEs) could become the future high-return investment for foreign investors.  Historically, investors have been reluctant to invest in French SMEs and have generally preferred investing in other more attractive countries such as the US, England and Germany. However, with investors preparing for a much anticipated, if yet to fully materialise, economic recovery in 2010, this situation could soon be reversed as they reevaluate their investment strategies and potentially look for new opportunities in France. 

An investor contemplating diversifying should consider that the SME market in France is highly competitive and combines innovation with advanced technology products benefiting from the French reputation for savoir faire around the world, as well as from extensive talent in the research and development field.  France has approximately 2.6m SMEs, which employ 14.3m people. Already a number of Chinese and Indian companies have invested in undercapitalised French SMEs, which constitute good bargains as a result of the economic downturn.

In order to stimulate this sector and attract foreign capital, several significant incentive measures have recently been enacted by the French government to facilitate foreign investments.

For example, the French law regarding labour, employment and purchasing power (Tepa), introduced in 2007, established a package of measures for SMEs, including important new incentives for employees to accept overtime (ie, time beyond the statutory 35 hours per week). The compensation for overtime hours incurred is exonerated from social security contributions and income tax, and the reductions in employee contributions may amount to a maximum of 21.5% of the employee’s total compensation.

Another measure included in the Tepa is a reduction of wealth tax charge (ISF) equal to 75% of the investments made by a taxpayer in non-public SMEs with a maximum of €50,000.

In addition to the Tepa, the French law for the modernisation of the economy (the LME), introduced in 2008, is aimed at stimulating economic growth and jobs creation and includes several measures applicable to SMEs.

More importantly, the LME has created a French Small Business Act (the pacte PME France) based on the American model of 30 July 1953, a development long promised by previous French governments and expected by Medef, the French employers’ organisation.  The pacte PME France, which applies to the high technology market of research and development, and to technology studies on works, supplies or services meeting certain conditions in connection with their level of innovation, stipulates, inter alia, that on an experimental basis and for a period of five years, public buyers can reserve a share (up to 15%) of their government procurement contracts for innovative SMEs or treat them preferably upon equivalent offers.

The French 2009 finance law (loi de finances pour 2009) has also gradually suppressed, over a period of three years, the minimum annual corporate tax (imposition forfaitaire annuelle), which had to be paid by all companies subject to corporate tax, including SMEs, if their turnover was equal to or exceeded €400,000.

Another tax incentive lies in the enlarged scope of the research and development tax credit (crédit d’impôt recherche) implemented in France on 1 January, 2008, pursuant to which innovative companies, under certain conditions, benefit from a tax credit equal to 30% of their research and development expenses, up to an amount of €100,000,000 for the first year. Under this enlargement, the legal instruments available to companies also include new expenses that are now eligible for the research and development tax credit, such as expenses granted to certain public utilities foundations. France also created the innovative new company (jeune entreprise innovante) status in 2004, enabling such companies to benefit from tax and social security exemptions as well as from a research and development tax credit.

Also, as of 1 January 2010, the French 2010 finance law (loi de finances pour 2010) has abolished the local business tax on productive investments which was blamed for hindering investments. This suppression applies to new investment flows and existing investments and will considerably reduce the local business tax burden on industry and make French SMEs more competitive where capital-intensive investments are concerned. The local business tax has been replaced by an alternative tax which is not based on investments ­– ie a ‘contribution économique territoriale’ – which is divided in two parts: the cotisation foncière des entreprises, assessed on the rental value of properties; and the cotisation sur la valeur ajoutée des entreprises, calculated on the basis of value added.

In addition, inspired by the UK remittance basis system, which contributed to reinforcing the attractiveness of the City, the LME bolstered the installation in France of impatriés – foreign executives occupying a position in a company established in France and who have not been French resident for tax purposes for the past five years prior to their arrival in France.  On a temporary basis, until 31 December of their fifth year of employment, and subject to meeting certain conditions, the impatriés are exonerated, among other things, from the payment of income tax on any additional remuneration (expatriation bonuses) that they receive from their activities in France.

Similarly, in order to compete against the British Alternative Investment Market (AIM), France established the Alternext market in 2005, designed to be an alternative source of financing for SMEs. Since its inception, the Alternext market has been subject to several significant modifications designed to increase its attractiveness, in particular the ordinance of 22 January, 2009, which, among other things, reduced the permanent information obligation for listed companies.

Moreover, in November 2004, France launched the concept of a ‘competitiveness hub’ (pôle de compétivité), which has the purpose of having companies, training centres and research units work in the same place on joint innovative and international projects. These competitiveness hubs, financed by French subsidies, which offer total tax exoneration for the first three profitable fiscal years and up to 50% for the next two profitable fiscal years, have already attracted more than 500 foreign companies, including companies such as Canon, Tata and Bombardier.

Since 1 January 2007, France has also joined the majority of the other OECD countries by making capital gains realised upon the transfer of equity shares held for at least two years, exempt from any tax.

Finally, in August 2005, French law created the title of ‘living heritage company’ (entreprise du patrimoine vivant), which can be claimed by companies having an ancestral or unique industrial or traditional know-how. Companies holding that designation do not receive money but benefit from tax advantages, including innovation and apprenticeship tax credits from being recognised both nationally and internationally.

All these measures, which are aimed at increasing the attractiveness of French SMEs, constitute a recent trend in France aimed at facilitating foreign investments. The sum of these activities should definitely ease the concerns of foreign investors and help them regain confidence in the French market.­ Consequently, foreign investors should look past their historical tendencies and examine the French market while the bargains last. fe

• Gaël Saint Olive is a partner and Olivier de Taffin is an associate in the Paris office of Jones Day

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